How advisers can defuse the pension IHT timebomb

Since the Autumn 2024 Budget introduced proposals to bring unspent pensions into scope for inheritance tax (IHT) from April 2027, advisers have been thinking about how retirement and estate planning conversations may need to evolve, even if many are waiting for greater regulatory certainty before taking action.

For many advisers, the immediate concern is to revisit those clients that had consciously planned to pass on their pensions IHT-free. However, as April 2027 draws closer, it seems clear the rule change will impact many people who have simply accumulated sizeable pension pots over long periods, because they believed investing in a pension was the sensible thing to do.

Thousands of pension pots brought into scope for IHT

Indeed, according to HMRC’s policy paper, the government believes that of around 213,000 estates with inheritable pension wealth in 2027 -28, “10,500 estates will have an IHT liability where previously they would not, and around 38,500 estates will pay more IHT than would previously have been the case”. What the figures cannot determine, however, is how the new rules will change people’s behaviour.

Some advisers have argued the change means the government is ‘putting up barriers’ to saving for retirement. While the government would no doubt dispute this, there is clearly a risk it could undermine people’s confidence in pensions as a reliable retirement vehicle. And with changes to salary sacrifice also due from April 2029, many will be questioning whether it is worth forgoing short-term earnings for longer-term security if their savings risk being penalised further down the line.

So, how can advisers defuse the unspent pensions timebomb? Perhaps by reiterating to clients that pensions should still be at the centre of their financial plans after April 2027, but as a source of retirement income, rather than an estate planning wrapper. The post-April 2027 landscape will make it more important for advisers to discuss other ways of planning for IHT with clients, including investment structures such as Business Relief (where suitable), as part of a wider estate planning framework.

What does this mean for intergenerational planning?

The new environment for IHT, and the relatively short lead-in time before the changes take effect, does give advisers the opportunity for a reset, specifically around their approach to intergenerational planning. This is really important, because when it comes to estate planning, advisers increasingly need to look both up and down the family tree.

You may have several clients in their 60s who are thinking about their own estate but are also in line to receive their own inheritance in the not-too-distant future. In other words, knowing what a client stands to inherit in the future can materially change the advice you give them today. Equally, understanding whether intended beneficiaries genuinely need an inheritance, or at what stage of life, can lead to more innovative and practical planning decisions.

Those clients might need to be gently reminded that familial wealth doesn’t necessarily have to flow in a straight line. In cases where already financially independent family members don’t need their inheritance, skipping a generation, or redirecting wealth sooner, could be both more tax-efficient and aligned with the family’s wishes. This is where reframing wealth as legacy can be really important in clarifying clients’ intentions. Advisers who position themselves as advisers to families, rather than the individual, are better placed to help those in a position of wealth to look both ways and connect the dots.

A greater role for personal representatives

Another important aspect for financial advisers to consider from April 2027 will be the increased burden placed on bereaved families andthepersonal representatives responsible for administering the estate. As pensions come into scope for IHT, pension administration will become more demanding, the paperwork more exhaustive, and the risk of delays and confusion will rise steeply. Personal representatives will need to lean on advisers quite heavily to help them get all the paperwork together.

It might therefore be worth talking to clients now about simplifying their financial arrangements where possible. That could involve reducing the number of small legacy pension pots, rationalising cash holdings, or ensuring assets are easy to identify and administer. Of course, this doesn’t mean choosing consolidation over diversification, but it does mean removing unnecessary complexity and clutter in your clients’ financial affairs, so that each component is working hard and genuinely adding value.

While estate planning can be complex, it’s also in some ways, very simple. It starts with asking the client what they want their legacy to be, who it should help, and when that inheritance will make the most difference. Beyond that, it’s about developing a holistic approach for each family that includes the best available toolset, which will often mean gifting, trusts, insurance and Business Relief. The good news for you and your clients is that time is still on your side.

Important information

For investment professionals only. Tax treatment depends on the individual circumstances of the investor and is subject to change. Tax reliefs depend on investee companies maintaining their qualifying status. This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.